Department of Education’s Latest Borrower Defense Report Reveals Unfair & Unjustified Limitation on Relief

As lawyers who work with people who have been defrauded by for-profit schools, we support the U.S. Department of Education in its stated mission to “make the process of forgiving loans” for such students “efficient, transparent, and fair—and to ensure students receive every penny of relief to which they are entitled under law.”  These were the words of U.S. Education Under Secretary Ted Mitchell, when he announced on June 25, 2015 that the Department designated a Special Master to oversee debt relief for borrowers defrauded by Corinthian Colleges.

Indeed, parts of the final borrower defense rule released by the Department today are positive steps toward providing relief to defrauded students and preventing fraud and abuse of students and taxpayers by unscrupulous schools.  Notably, the Department has banned the use of forced arbitration agreements that serve to suppress the claims of students and mask illegal behavior; identified circumstances that will require schools to post letters of credit when warning signals indicate that the school may be violating the law; and sketched the outlines of a process that has the potential to create a path to relief for individuals and groups of defrauded borrowers.

The Project and other members of the legal aid community submitted comments asking the Department to strengthen this rule and make it more transparent and fair.  Most of our suggestions were not adopted.  In one area in particular—the application of statutes of limitation to a borrower’s ability to recover money already paid toward an illegitimate debt—the Department has departed in an inexplicable and inexcusable way from its commitment to giving defrauded students “every penny of relief to which they are entitled.”

The Department has decided that borrowers can only receive a refund of money already paid on a loan if they raise a claim within six years.  More troubling, in the Report issued today by the Department’s Borrower Defense Unit, the Department has announced that 293 claims from Corinthian borrowers – based on misrepresentations made about the general transferability of credits – are “eligible for relief subject to the applicable state statute of limitations.”  Although it is not entirely clear what this language means, it appears that the statute of limitations will act as a bar to the return of money these borrowers already paid towards Corinthian debt.

This is a mistake that the Department should fix.  Its application of a statute of limitations is entirely discretionary.  In crafting its new rule, the Department had the choice whether to impose such a requirement.  And even for loans already issued, the Department’s regulations clearly specify that once a borrower establishes a defense to the repayment of a loan, the Department may award additional relief, including the return of amounts already paid.

A statute of limitations serves a purpose in the law. It can give private parties comfort that what is in the past is in the past. It also encourages those with legal claims to come forward, while evidence is still fresh.  But there is absolutely no basis for punishing borrowers with a statute of limitations on the theory that they have been sitting on their rights.  As the Department has acknowledged, it needed to undertake this rulemaking precisely because, despite the decades-long existence of borrowers’ right to a defense to repayment, it had failed to enact procedures or notify the borrowing public of how to avail itself of this right.  In fact, it was only in August 2014 that the Department publicly acknowledged that although regulations “explicitly provide” for borrowers in default to assert defenses to repayment, “a borrower who is not in default can also assert a claim that the loan is not legally enforceable.”  This was in response to requests for information regarding Corinthian from Senator Elizabeth Warren and others.

Even if the Department were bound to apply a statute of limitations to limit recovery for defrauded borrowers—and it is not—its limited statements give no indication of exactly how it proposes to apply it against individual borrowers.  As announced today, in the new regulation, the Department abandons longstanding state consumer protection law as the substantive basis for borrower defense, determining that state law is too “complicated, uneven, and burdensome.”  This is exactly the problem with applying statutes of limitation to existing loans.  State laws vary in their application of statutes of limitation, both in length of the time period and circumstances in which a claim is barred.  In addition, equitable doctrines provide for the tolling, or pausing, of a statute of limitations in circumstances where a defendant fraudulently concealed the basis of a claim.  In other instances, a statute of limitations clock will not even begin to run until the claimant “discovers” that she or he has a claim. In the circumstance cited by the Department, a person who attended Corinthian because they were lied to about the possibility of transferring credits to another institution may have only discovered that this was a lie when they attempted to transfer credits and were denied.  How will the Department engage in this analysis for each individual, especially when it has not made clear to applicants that such evidence is needed?

These problems highlight three steps that are absolutely critical if the Department is to make good on its promise to give borrowers all of the relief to which they are entitled.

First, the Department should abandon any imposition of a statute of limitations on borrower defense claims. Borrowers who submit discharge claims years after enrolling in a predatory school do so because they were not previously aware of the scope of their school’s misconduct, or of their rights and how to pursue them. This fact is regularly borne out in our experience working directly with student loan borrowers who have suffered for years after being taken advantage of by their schools without realizing they had a right to have their loans discharged. It is also demonstrated by the Department’s own acknowledged difficulty reaching people who are eligible for discharge based on its findings and informing them of their eligibility, as reflected by the low percentage of borrowers who have managed to obtain the relief for which they are eligible.  The public should be appalled at the idea that, because a borrower happened to make payments, or involuntarily surrendered a tax refund, including an Earned Income Tax Credit, in service of a debt that is now acknowledged to be the product of illegal fraud, the Department would choose to keep that money.

Second, the Department should immediately implement a moratorium on collection of all Corinthian debt.  As the Department’s report shows, only 12% of those who are in the presumptively eligible category (the “findings” students), have submitted the attestation form that the Department requires before it will consider actually delivering relief.  This is despite the massive outreach efforts the Department has undertaken.  A recent letter from Senator Warren exposes that nearly 80,000 former Corinthian students are currently in some form of debt collection as the direct result of Department actions.  Others, including The Institute for College Access and Success have called for a moratorium on collection.  And last month, the Project asked a federal court to declare that such a moratorium is required under law.  Continued collection on Corinthian borrowers is especially perverse given that the Department has taken a hard stance against returning this money once a borrower actually applies for relief.

Third, the Department needs to implement relief on an automatic basis where the evidence supports widespread fraud, as it clearly does in the case of Corinthian.  The Department has this authority, under existing law and under a fair interpretation of the forward-looking rule it just announced.  Rather than spending effort and resources on Facebook campaigns, and rather than engaging the army of lawyers and contractors required for a case-by-case analysis of the equitable imposition of a statute of limitations, the Department should take action across the board to bring desperately needed relief to borrowers.